What is an 'Absolute Value'
An absolute value is a business valuation method that uses discounted cash flow (DCF) analysis to determine a company's financial worth.
The absolute value method differs from the relative value models that examine what a company is worth compared to its competitors. Absolute value models try to determine a company's intrinsic worth based on its projected cash flows.
Also known as Intrinsic Value.
BREAKING DOWN 'Absolute Value'
Finding out whether a stock is under or overvalued is a primary play of value investors. Value investors use popular metrics like the price to earnings (P/E) and price to book ratio to determine whether to buy or sell a stock based on its estimated worth. In addition to using these ratios as a valuation guide, the discounted cash flow (DCF) valuation analysis is another way to determine absolute value.
With a DCF model, some form of a company’s future cash flows (CF) is estimated and then discounted to the present value in order to determine an absolute value for the company. The present value is regarded as the true worth or intrinsic value of the firm. By comparing what a company's share price should be, given its absolute value to the price that the stock is actually trading at, investors can determine if a stock is currently under or overvalued.
Examples of methods used under the DCF model include the dividend discount model (DDM), discounted asset model, discounted residual income method, and the discounted FCF method. All of these models require a rate of return or discount rate which is used to discount a firm’s cash flows – dividends, earnings, operating cash flow (OCF), or free cash flow (FCF) – to get the absolute value of the firm. Depending on the method employed to run a valuation analysis, the investor or analyst could use either the cost of equity or the weighted average cost of capital (WACC) as a discount rate.
For example, consider Tesla Inc. (TSLA) which is currently trading on the market for $370.50 (as of June 2017). After running a DCF analysis on its estimated future cash flows, an analyst determines that the absolute value of the firm is $450.30. This presents a buying opportunity for an investor who is led to believe, based on the numbers, that TSLA is undervalued.
Estimating a company’s absolute value is not without its setbacks. Forecasting the cash flows with complete certainty and projecting how long the CFs will remain on a growth trajectory is challenging. In addition to predicting an accurate growth rate, evaluating an appropriate discount rate to calculate the present value can be difficult. Since the absolute valuation approach to determining the worth of a stock is strictly based on the characteristics and fundamentals of the company under analysis, there is no comparison made to other companies in the same sector or industry. But companies within the same sector should be considered when analyzing a firm, since a market moving activity (e.g. bankruptcy, government regulatory changes, disruptive innovation, employee layoffs, mergers and acquisitions, etc.) in any one of these companies can affect how the entire sector moves. Therefore, the best way to evaluate a stock’s real value is to incorporate a mix of both the absolute and relative value methods.

Relative Value
Relative value is a method of determining an asset or company's ... 
Terminal Value (TV)
Terminal value is the value of a bond at maturity or of an asset ... 
Discounted Future Earnings
Discounted future earnings is a method of valuation used to estimate ... 
Value
Value is the monetary, material or assessed worth of an asset, ... 
Abnormal Earnings Valuation Model
The abnormal earnings valuation model is a method for determining ... 
Discounted AfterTax Cash Flow
The discounted aftertax cash flow method values an investment ...

Investing
Value Investing: Why Investors Care About Free Cash Flow Over EBITDA
Examine value investing philosophy and methodology to see why free cash flow is more important than EBITDA in pure intrinsic value calculation. 
Personal Finance
Discounted cash flows or comparables: Which to use
DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method. 
Investing
Equity Valuation In Good Times And Bad
Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value. 
Investing
Taking Stock Of Discounted Cash Flow
Learn how and why investors are using cash flowbased analysis to make judgments about company performance. 
Investing
How to Value Companies in Emerging Markets
Find out how to value companies from emerging market nations like China and India. Learn how to apply discounted cash flow to their equity valuations.

When can I use the Dividend Discount Method (DDM) to value a stock?
Learn about the dividend discount model and when it can most appropriately be used to measure the value of a stock by fundamental ... Read Answer >> 
How do you use DCF for real estate valuation?
Learn how discounted cash flow analysis is used for real estate valuation and the various factors that go into calculating ... Read Answer >> 
When evaluating terminal value, should I use the perpetuity growth model or the exit ...
Examine the important calculation of a terminal value in discounted cash flow analysis, and learn which method of calculating ... Read Answer >>